The Apportunity

A month or so ago I spoke in Blenheim. One of our great partners, Neil from Winstanley Kerridge was introducing me and Xero and it surprised me that he thought the biggest benefit of Xero was the ecosystem of applications that connect to the General Ledger (Xero). Neil isn’t alone, either – I heard similar thoughts on the weekend at Xerocon AU:

At our Australian Gold Partner lunch two thirds of the conversation was about add-on partners. Accountants were talking like IT geeks.

During the breaks at XeroCon I had numerous accountants approach me, with iPads open, showing me apps they’ve been working on. Accountants as software developers!

We had 80+ Add-on partners to the developer sessions of Xerocon. We were blown away by how many new companies exist solely to connect to Xero.

So what’s happening?

The cloud is changing the integration model

In the desktop world we know that small business owners won’t spend $10k on consulting services to integrate their software. That’s why many small businesses don’t run Customer Relationship Management (CRM) software as customer data needs to be synced between accounting (invoicing) and the CRM. We covered this back in 2010 Best of Breed v. All In One.

In the cloud generation, vendors are linking their solutions together on the server side, reducing the risk of bespoke integration and instance to instance integration projects. Linked applications can provide a much better fit for small business owners.

Cost jump to low end ERP

There is a big gap between the amount spent on commodity desktop accounting products and low-end ERP systems. If you are running MYOB or Quickbooks you may be spending $1-3k per year. The next step up to low end ERP might be tens of thousands in licensing, $20-50k of implementation and $10-20k per year of maintenance. We see lots of businesses that should be on larger packages still running on low cost offerings. There is nonlinear scaling of costs between very small and mid size companies.

The add-on approach starts to fix this problem. Accounting becomes a commodity service and small business owners can invest in great line of business applications that can really fit their needs. There is starting to be lots of choice.

Accountant as IT consultant cycle

Everything goes in cycles. In the 90s and 2000s as desktop software and client server software was taking off, accounting firms got into the software consulting space.

But this has always been a graveyard as customizing and integrating complex software is hard and when you are charging a small business owner by the hour resentment soon follows. We know of lots of instances where an Accounting firm has had troubles with software and ended up sending a bill for tens of thousands of dollars which is never going to be paid.

Consulting arms within small to mid size accounting firms were often spun out or shuttered.

But under the cloud generation the accountants are coming back to provide integration services, as it is much lower risk.

Cloud has changed the game

The rise of cloud based offerings with open APIs of cloud vendors are creating a new model. Rather than consultants having to link instances of software together, the new generation of cloud providers are linking entire solutions together on their own.

This makes sense for several reasons.

New vendors all want customers, so by working together they can share customers.

As the products are new, no one has had the time to build everything. Partnering is logical.

Piggybacking on a successful vendor with traction creates immediate access to a high affinity market, so much lower customer acquisition costs.

The cloud vendors, working together, are enhancing the value of their respective offerings. A tide that raises all boats.

While platform plays take major reinvestment and time, niche vertical applications can be developed quickly and do not necessarily require significant investment.

Explosion in network partners:

And a few years into it some of those solutions are getting really good.

It’s happening

Our Gold partners are those partners who got early into Xero and are transforming their practices. They’ve typically been following the cloud space over the last few years and have seen first hand the impact of cloud technology on their own practices and their clients. They can see how transformational it is and once they had a good experience with us and an integrated partner they start to get hungry for more. However, they’ve all experienced the pain that comes from trying to implement products that don’t quite fit and have seen how quickly you can rack up costs that can never be billed.

They are asking us:

How do we find out about new Add-ons

How do we know when they are good

How do we know which situations they are best for and which scenarios to avoid.

There are quite a few things we do to help.

Promote our new Add-on partners on our website and in direct communications with partners

Create a partner forum to discuss add on partners and see others experience

Promote solutions that work well together. We think a good way to do this is on verticals. Here is a recent retail vertical we’ve been working on: http://www.xero.com/business/retail

Connect accountants to the new breed of integration specialists that are emerging

Apportunity knocks

So we think the add-on opportunity is simply huge and our gold partners are proving that every day. The characteristics of vendor connected solutions eliminate a lot of the risk of instance to instance integration. The accounting partner can leverage the work the vendors have done and add real value at integration time.

This ecosystem dynamic is happening faster than we anticipated but shows the vast potential in the small business cloud space and the unprecedented opportunities to make small businesses more productive.

18 comments

Josh Smith - xocashflow

July 23, 2012 at 4.23 pm

This is so very true. The app ecosystem is what transformed the iPhone from a nice piece of technology to the biggest revenue generator within the world’s biggest public company. Apps make it possible to tailor a base platform to suit any number of specific needs – while allowing the developers of that base platform to focus on making the core as solid and interoperable as possible, without straying into a tangled mess of extra features and niche verticals.

The add-on we developed is exclusive to Xero and we developed it that way because Xero had the most active and open developer ecosystem, as well as an internal culture that is very supportive of add-on partners. Throughout the development process, key members from the XeroAPI team offered assistance and guidance and the user base now has access to this extra feature, should it be required, without Xero having to develop, support and refine it internally.

An active app base is common to all successful cloud software providers (Salesforce.com, 37Signals, Google Apps, Dropbox, Shopify, etc) and transforms Xero from a simple accounting platform into the core of a custom business management software suite.

Totally with Josh and Phil above, customers in the last year have been all about Xero and now it’s “Gayle, have you heard about this xero add-on”? “I want it – come show me how to connect it” – the trick of course is to keep them calm long enough to investigate. Never a dull moment – Gotta love Xero!

Yes, great post Rod. I’ll be interested to see how fast accountants and bookkeepers start adding services based on recommending cloud software to augment income from compliance work. It could be a path into business consulting for bookkeepers, “virtual CIO” services for accountants, etc.
A whole new world…

Totally agree – it amazes me the speed that add-ons are being developed and the hunger in our clients to have them. We are also starting to get referrals from other accounting firms who are not quite up to it regarding Xero and add-ons. And if you get stuck – or in our case have large quantities of set ups to do then Gayle Buchanan above is brilliant at helping out clients get started on Xero, WFM etc…

The Xero ecosystem is a fantastic way for clients to grow with your software as well. As they grow & need more you can easily bolt on additional solutions. It also allows us as accountants to provide tailored solutions to different Industries. With the likes of Vend, Unleashed & GeoOp we can give our clients real time daily advice on sales, margins, productivity & anything else clients need to make those massive improvements. Thanks again Xero for being awesome.

Great post Rod – I’d be interested to hear your thoughts around the tensions that exist in ecosystems generally (not Xero’s in particular) when the ecosystem “host” acquires a particular ecosystem player. Obviously Twitter has taken extreme heat in the past around this – other client developers cried foul (fowl? – see what I did there?) when they bought TweetDeck seeing it as a bait and switch type move, or at least a “let others do our development” move.

I wonder if there have been analogous situations for Xero during the PayCycle, WorkFlowmax and now Spotlight deals – and how you balance those two conflicting drivers (supporting the ecosystem vs building out the core platform).

Anyway – as someone who owns a business avoiding building out MYOB functionality because of the cost, hassle and lack of robustness, and also someone who runs businesses enjoying the benefits of the “loosely-coupled” Xero ecosystem, your post resonates. Even the “quasi-suite” players like Pearl have loosely coupled integrations across niche functional areas – seems best of breed is the way to go for SMBs

We think a lot about the effect on the ecosystem when we make acquisitions.

We’ve so far acquired 3 ecosystem partners (Paycyle, Workflowmax and Spotlight work papers) who are all very inline with a strategy that we communicate often.

In all cases our acquisitions came after strong feedback from our customers and advisor partners.

In the case of Paycycle we did a lot of work to stimulate payroll providers in AU before we acquired. We deliberately haven’t introduced payroll into New Zealand where we had strong existing partners.

For WorkflowMax we have preserved the independent brand and present it fairly neutrally with other job costing providers and we hope we’ll see other vertical solutions develop. Our real focus is on the accountants practice management side.

We are always open with our API partners when they approach us on if this is an area we’ll likely get into over time. For example better accounts receivable features is a space we’d like to do eventually but we haven’t got there yet but we have been open with partners about that.

We have no interest in acquiring all good partners. Despite irresponsible speculation in the media (in turn based on uninformed guesses) that we were looking at Vend – our partner of the year last year and an exciting company – our strategy is to be a horizontal accounting engine. Investing directly in verticals has never been part of our strategy and doesn’t make sense.

Something we are looking at though is: do our top partners have the resources to keep up? We’re investigating ways we can help them get funded so they can invest along side us. We’re very aware that investors in smaller private companies will be different from those that invest in Xero as a public company but we’re thinking through ideas there now.

An analogous industry springs to mind – pharmaceuticals. Despite the moniker, ‘big pharma’ firms do not have the resources (nor necessarily the inclination) to develop hundreds of new drugs simultaneously, so they fund research in fertile areas and acquire promising bio-tech companies that emerge from this pluralistic munificence.

Companies like @MailChimp and @BigCommerce have, similarly, launched ‘integration funds’ to stimulate the development of a broad ecosystem – and MailChimp has already acquired some of those early adopters.

Of course, the problem with a pluralistic approach is that you end up funding a lot of losers before the winners emerge, but at least the investment in each is small and – as Rod observes – the mere existence of a healthy ecosystem gives Xero a competitive advantage.

Lest anyone accuse me of holding out my hat, well, OK, starting-up is hard! However, even without any prospect of financial assistance we have been keen from the outset to catch a ride in Xero’s slipstream because it is evident that this is a company that is going places.

It used to be called Systems Integration, a realm occupied predominantly by qualified ICT guys…now it should be called Cloud Integration and with the proliferation in API’s the skills required are less technical and more commercial. What Xero has achieved is spawning a new world industry whereby the Advisory profession now has leadership in how to monetise bread and butter advisory services into recurring revenue terms show’s that it’s not about the software so much, it’s about helping people achieve their own goals.
Combining software, culture and partnership is a winning formula. At http://www.intracore.com.au we’re helping the Advisors become the Cloud Integration change agent within their Health Professional client base which in effect is a “modern practice” idea now passed onto their clients. Looking forward to many more XeroCon’s and go Cloud!

As a small business owner who has used many CRM add-ons, I notice that the xero CONTACTS section has been kept basic to date

Is there any plans to update contacts? Xero contacts are only entity’s and not individuals, and herein lies the nucleus of the challenges to optimise: there is no parent/sibling relationship found in the CRM add ons.

As xero is becoming more than an accounting package and more like the nucleus of the data flow for a small business database, is it possible to rework contacts to reflect how they are structured in your CRM add-ons?

@luke – u bet. We originally went for simplicity with a single level vCard style contact model. We know we need to do multiple addresses and a few other things. We’re working through a pretty big program of work this year and hope to next year overhaul contacts.

@Rod,… Great to hear its in the pipeline!! That was my only & last remaining concern with xero….all the others issues i had were fixed with subsequent updates in the last year…Time for me to get on with business then

While I welcome the addition of new “apps” or addons to Xero to extend functionality, I’d like to add a word of caution. I’m concerned that it may be too easy for an addon partner to start up, and then not further develop their product which adversly affects those of us who have chosen to use their addon. Although at first glance these addons seem similar to the app marketplace of Apple, it’s not exactly a true comparsion due to the time investment in setting up these addons, and also the absolute dependence on some of them for the livelihood of a business.
While it’s currently easy for an accountant for example, to pay a developer in India to create an addon, they may not be willing to make updates as time goes on, or they may become bored with their creation, letting it lapse. Changing inventory partners for instance is a big deal, and so we need to know that we’re making the right choice when advising our clients to use a particular addon. Even moreso if we’re on fixed price agreements, and so extra time spent changing may not necessarily be a recoverable cost.
I don’t know what the solution is here, but I think some caution needs to be heeded to simply signing up with the latest new addon that some accountant or other person has decided to develop on the side of their existing business.

@Charles some great food for thought there, thanks. As manager of the Add-on partner program, my primary responsibility is to maintain the quality of the Add-ons we certify – if we don’t get that right, all else quickly comes off the rails.

There are lots of different Add-ons, though few are so simple that the investment to get to stage 1 and become certified is trivial. As you dial up the range of functionality (inventory is a great example) it becomes more and more costly to do it right.

That in itself, and a self-policing marketplace (we rank the directory in order of popularity for example), ensure that those who enter the marketplace will (hopefully) want to keep up the pace. I know many of our recent Add-on partners are already working on improvements based on customer feedback.

I think the dependence issue will always be there. No easy answer here other than to take the time to sign up for a trial or webinar, drop a line with a question or two and see what sort of response you get. On our side, we will continue to maintain standards for becoming an Add-on partner (http://developer.xero.com/become-a-partner/).

Great read. Our experience, having recently joined the Xero ecosystem, is consistent with the benefits outlined here. The incumbent solutions in our space (appointment scheduling) try to expand their products to cater for complementary features. It tends to result in a product that not only does the “extra” things poorly – but the core offering is lost as well.

We love the focus that is brought to apps by the ecosystem model. We also love working with other providers that clearly kick ass in their chosen verticals.

We are about to release our new ERP SaaS (with CRM) that integrates with Xero for Payroll and Accounting, it’s called BMS (http://www.bmserp.com/).

Our point of difference with other ERP providers is that customers can continue to use their familiar cloud accounting software, as we will integrate it into a full ERP suite.

BMS is an ERP solution for growing businesses looking to upgrade from using just cloud accounting software.

The next step might currently be add-ons for CRM, support desk or possibly inventory software… but as businesses implement multiple cloud-based applications they also tend to isolate business components, creating separate silos of customers, products and suppliers within each app. This creates data quality issues that can require constant syncing and de-duplication.

We believe that BMS makes for a better ‘next step’ by adding all the extra functionality they were lacking, without having to deal with costly migrations and retraining for new accounting software.

It’s also a good option for accountants looking to recommend an ERP solution, as clients can continue using the cloud accounting software in which the accountant is a partner.

Pricing, though not free, is alot more affordable than most ERP solutions (like Netsuite), as the licenses include access to all applications (CRM, Sales, Billing, Stock, Service) for no additional cost. http://www.bmserp.com/pricing